Piercing the Corporate Veil

The corporate veil may be piered in situations where there is fraud or when a subsidiary of the corporation is little or nothing more tha an alter ego of the parent corporation.  In rare circumstances, officers and/or director and/or shareholders of a corporation may become liable for the acts or debts of the corporation if a Court determines that the corporate form has been ignored or disregarded by the company.  An example of a situation in which a Court might make this determination is one in which personal and corporate funds are co-mingled.  Another example would be office dominant shareholders siphoned off corporate funds.   Another scenario in which creditors may seek relief by piercing the corporate veil is based on a determination about whether the corporation was adequately capitalized.   Finally, the court will determine of all of the corporate formalities were followed including the payment of dividends as well as the maintenance of separate corporate records

Persuading a court to look beyond the protections afforded to a properly incorporated corporation is a difficult challenge.  It is likely that the claimant requesting this form of judicial intervention will need to prove some form of fraud based on the existing corporate structire.  Piercing the corporate veil is a legal theory and a legal tactic that if successful can be used to attach the assets of individual shareholders when there is a judgment against a corporation, but the corporation has insufficient funds or assets to satisfy a judgment. 

Since one of the primary benefits of creating a corporation is to limit the liability of its shareholders, corporation and their shareholders are likely to fight hard against any effort by creditors to pierce the corporate veil

© 2009 by Michael C. Dennis.  All Rights Reserved.  Michael is the author of "Credit and Collection Handbook."